Dollar Reversal Underway?

What an unexpected start to the trading week. Today the US dollar advanced strongly against many currencies on the back of weaker-than-expected Eurozone data, and it wasn’t just any Eurozone data; it was the widely watched German IFO survey. Business confidence in Germany, Europe’s largest economy, deteriorated significantly in June and reached the lowest level since December 2005, with the business confidence index falling to 101.3 in June from 103.5 in May. The market had expected a reading of 102.5. Even though the headline index has worsened, the business climate indicator for the construction sector improved, but that isn’t going to make the European Central Bank happy.

The ECB is scheduled to raise interest rates in July and won’t be pleased if business confidence falls. Another Euro-unfriendly economic release today was the Eurozone PMI index which showed both manufacturing and services falling below the key 50 reading.

Speculators Net Long Dollar

For the first time in almost 18 months, IMM (International Monetary Market) currency speculators are placing their bets on a US dollar rally. According to the latest futures data, net long dollar positions (against the Euro, Swiss franc, yen, British pound, Canadian dollar and Australian dollar) stood at $2.58 billion in the week to June 17, flipping from the previous week’s short position of $2.65 billion. Adjustments could take place this week after the Fed rate announcement this Wednesday as that would give traders a glimpse as to whether the Fed is seriously considering raising rates in the near term.

You can access the latest Commitment of Traders data for all futures contracts here.

Forex Trading

The Euro fell by the biggest amount against the US dollar in more than a week, hitting an intraday low around 1.5470. Its nearest support is around 1.5440. The Euro is likely to be shielded from aggressive shorting interest ahead of the US FOMC meeting this Wednesday. USD/CHF rose to a high of 1.0490 where it met resistance. Further topside gains will depend on today’s performance of the US stock markets and oil prices. GBP/USD fell 170 pips to a low of 1.9585 after Rightmove said today that the average asking price for a home fell 1.2% from May to 239,564 pounds.

There is a lot of event risk this week, so it would be better for traders to take intraday profits rather than hold out for the week.

Economic Calendar for Tuesday:

• French consumer spending 0645 GMT
• Swiss UBS consumption indicator 0800 GMT
• Former Fed chairman Greenspan speaks 1230 GMT
• US S&P/Case-Shiller house price 1300 GMT
• US consumer confidence 1400 GMT
• Japan merchandise trade balance 2350 GMT

Comments

[Whidbey.]

The gold ratio seems to think there could be a dollar revival. But I am skeptical that works more than a few days. The ECB will raise rates just once to show its priorities - fighting inflation. That will jar the sensibilities of the currency traders. They live in the future - real or imaginary - and will not tolerate anything that will attract money to the Euro. It is just a flutter, nothing real.

[MuddlingInvestor]

Dollar bottomed. It will go up from here. How fast, how many reversals are on the way, I don't know. But it's obvious now that Euro is overpriced compared to dollar. Since 2002 I invested in different funds and companies based in Europe and made some money on it. I'm moving away from most of those now. Of course, I'll leave some money there, gotta stay diversified, but US is the place to invest.

[francisschutte]

I am sorry but this all looks as propaganda to me: a lot of wind and words because the other arrows are finished. Looking at the Dollar/Euro charts, I really don't see any excesses in fluctuations. Fundamentally, with the USA importing huge quantities of oil and other finished products, the balance doesn't really favor the Dollar, even if the currency is cheap. Last but not least, the EU and the Far East have nothing but advantages with a cheap dollar. After all, commodities and oil are still quoted in Dollars!

[gigem77]

This is the weakest dead cat bounce the dollar has made in 2 years. It failed at 74. The dollar (DXY) has failed to rise above the 200 sma since early in '06. That number today is 75.14. Good luck taking out that technical level, dollar bulls. This week the fomc will not raise rates and next month the ECB will. Trichet said so. Would he lie? ;) Nothing fundamental has changed. The trade, budget and current account deficits are still growing. Inflation is running hotter, even using the phony BLS data. Money is flowing out of stocks, bonds and real estate. It's flowing into commodities. So where is the source of a dollar rally?

Jawboning and short-covering into the quarter-end are the last hurrah for the buck. But it won't get 'er done.

[pooramerican]

this is not the first time there was a net long position in the USD. Such position also existed about 6-8 weeks ago if I remember correctly but it did not sustain.

I am bearish on europe in terms of economy: Aside from russia and former soviet union nations they too need to import a lot of stuff and they have very high unemployment and entitlement programs. They are socially struggling but the soccer events are probably holding them together. I just don't see europe as the 'awakened giant' or 'the comeback kid'. they may raise interest rates, they may have less foreclosures but they just don't have the natural or human resources to compete. It is all china from here and it has been in the last 5 years.

[DividendGrowthInvestor]

I would love to see the dolalr gain ground versus the euro. The JPY is down more than 10% from its 2008 highs, whereas the Euro is only off about 4%.

[semar]

honestly, this wasn't such a hard to seen move. When on one hand of the pond everyone is screaming about the strong currency, the other one has to give up something.

[Florin]

I would love to see the USD rise against the loonie by double digit percentages before July 4. That would make my upcoming vacation much cheaper.

[CLH]

The dollar has reversed and is headed up. Gold tells me this. Also The fed cant lower interest rates any more meaning the dollar will rise. This started 6 weeks ago and will continue up. Commodities will top and finally tank.

[Eagle-Chief]

Don't hold your breath Gracie.....The dollar is about as dead as a toasted marshmallow.

[gigem77]

June consumer confidence came in much lower than expected. The dollar tanked. There is very little chance that the Fed will raise rates as economic problems continue to worsen.

[gigem77]

Well, I guess that's settled, lol. DXY 72.37 this morning, gold over 920 and crude at 141. The dollar is toast.